EU Watchdog Demands Insurers Fully Back Crypto Holdings—Risk Ahead?

The European Insurance and Occupational Pensions Authority (EIOPA) has proposed that insurers hold capital equal to the total value of their crypto holdings. This recommendation was included in a Technical Advice report sent to the European Commission on March 27.

EIOPA stated that the extreme volatility of digital assets makes them riskier than traditional investments. 

“Crypto assets can experience drastic price swings, and insurers must be prepared for the worst-case scenario,” the agency explained. 

The proposal attempts to bridge what is considered a regulatory gap between CRR and MiCA which does not specify what are the required Capital Requirements for exposures related to crypto.

Strict Capital Requirements Gain Support

According to EIOPA, there are four possible steps towards crypto asset regulation. They included no changes, the setting of an 80% capital requirement, 100% capital charge, or broader review of tokenised assets.

The agency firmly supported the 100% requirement, contending that “a partial capital charge underrepresents the risks, whereas a full charge guarantees that insurers stay financially secure in any market condition.” 

In contrast to conventional investments, where spreading out can lessen risk, EIOPA highlighted that “crypto market fluctuations do not adhere to traditional risk behaviors.” 

The report mentioned past price declines, indicating that Bitcoin and Ether have earlier experienced losses exceeding 80% and 90% of their value, respectively.

Comparison to Traditional Assets and Industry Response

The proposed rule would impose stricter capital requirements on crypto assets than other asset classes. Solvency regulations today charge 25% on real estate and 39–49% for equities, which is much lower than the 100% suggested for crypto.

EIOPA stated that the proposal is “not an excessive burden but a necessary safeguard,” adding that it would “protect policyholders by ensuring insurers have the financial backing to absorb crypto-related losses.”

However, industry players have voiced concerns. In January, Circle, the issuer of the USDC stablecoin, argued that a blanket 100% requirement ignores the “fundamental differences between volatile cryptocurrencies and regulated stablecoins.” Critics say a more nuanced approach may be necessary to account for variations in crypto risk levels.

Luxembourg and Sweden Face the Greatest Impact

The proposal is expected to affect insurers in Luxembourg and Sweden the most. According to a Q4 2023 report, Luxembourg accounts for 69% of total crypto-related insurance exposures, while Sweden holds 21%. Other affected countries include Ireland (3.4%), Denmark (1.4%), and Liechtenstein (1.2%).

Most of these holdings are tied to investment products, such as exchange-traded funds (ETFs), and are managed on behalf of policyholders.

Although EIOPA acknowledged that crypto exposure among European insurers is currently minimal—just 655 million euros, or 0.0068% of total industry assets— the agency warned that broader adoption of digital assets could require “a more refined regulatory approach in the future.”